A $7t opportunity: Banking as a Service gaining unstoppable momentum

By Puja Sharma

BaaS represents a $7 trillion opportunity – distributors, including retailers, e-commerce firms, and other consumer brands, are migrating towards BaaS solutions and expect overall growth to exceed 70% per year over the next three years.

Finastra published a market assessment report: ‘Banking as a Service: Outlook 2022 | Paving the way for Embedded Finance’. The research canvassed the opinions of 1,600 senior industry executives, exploring the opportunities presented by Banking as a Service (BaaS) – to provide retail or wholesale banking products and services to customers in context, as a service, using an existing licensed institution’s secure, regulated infrastructure with modern API-driven platforms.

Angus Ross, Chief Revenue Officer, Banking as a Service at Finastra, said: “There’s no doubt that BaaS is an incredibly exciting opportunity for the entire financial services ecosystem. Financial institutions can reach a greater number of customers at a significantly lower cost, while distributor brands can open up new lines of revenue and build deeper relationships with their customers. It’s clear from our research that consumers (retail or corporate) are changing where they source financial services and shifting to non-bank channels. This trend will only accelerate as integrating regulated products into the customer journey becomes as simple as creating a social media account.”

The research reveals the true extent of the appetite for BaaS, with almost 85% of respondents already implementing or planning to implement BaaS over the next 12-18 months. The research shows that financial services providers need four key capabilities to work with distributors and enablers and to monetize BaaS. From a technology perspective, these include:

• an open API platform;
• an integrated data and analytics platform; and
• specialized digital solutions to seamlessly integrate customer journeys

Brian McKenney, Chief Innovation Officer at HSBC, said: “The application of BaaS represents an attractive opportunity to create new value for businesses around the world. Embedding financial solutions will bring contextualized, integrated banking services into the products and platforms that businesses use every day. How providers partner and support this unique international need of businesses will, over time, be the real differentiator.”

It is estimated there will be as many as 60 billion IoT devices in operation by 2025; we expect these devices to be interacting, transacting and many will need to be financed. Incorporating embedded finance and BaaS solutions with IoT and the Economy of Things presents exciting new business and monetization opportunities.

“Embedded Finance and BaaS present a significant opportunity in the fast-growing ‘Economy of Things’,” said David Palmer, Head of Digital Asset Broker Product at Vodafone. 

“I am encouraged by the growing embedded finance ecosystem, especially as it relates to extending services to communities and businesses that have been traditionally underserved with limited offerings. Small businesses and entrepreneurs form the backbone of our economies. With thoughtful innovation, we have the opportunity to create a more level playing field and a more equitable future for all. Technology innovation ultimately needs to be about people,” Theodora Lau, Founder, of Unconventional Ventures added.

Finastra’s research also assessed the monetization strategies of distributors, enablers, and providers in BaaS, and explored the importance of partnerships. All respondents were in favor of a transition to a platform and marketplace model, where a greater range of niche solutions at competitive prices can be sourced by end customers.

From a product perspective, providers need dynamic and compelling offerings to entice customers.

Key findings

• Around 60-70% of distributors want to increase their spending on financial partnerships (including BaaS).
• More than 80% of regulated financial services providers expect the overall BaaS market to grow. Of these, 30% expect it to grow by more than 50% per year over the next five years.
• SME lending, corporate lending, and corporate treasury/FX services are poised to gain the highest traction. Simplifying SME lending through BaaS is expected to drive the growth of 30% by 2024.
• The majority of enablers, including big techs and FinTechs, expect the overall BaaS market to grow by more than 50% over the next five years. Some 40-50% of enablers want to increase their partnerships with distributors and financial services providers by more than 50% in the next five years.